Market Commentary and Fund Performance

Fund Performance Review

In January, the Japanese stock market plummeted amid growing concerns that the U.S. will raise interest rates and reduce quantitative monetary easing quicker than expected. Losses were especially significant in growth stocks, including high-tech and Internet firms that had been the focus of low-interest financing. Moreover, the global spread of the COVID-19 Omicron variant and heightened geopolitical risks surrounding Ukraine also seem to have spurred the decline. As a result, the Tokyo Stock Price Index (TOPIX) fell 4.89% in January, while the benchmark for the Fund, the Russell/Nomura Small Cap™ Index dropped 5.73% over the same period. The Fund’s performance fell 6.39% (HJSIX), underperforming its benchmark. The primary causes were that the Fund does not have many holdings in stocks with minor share price losses, including food and financials, and equities, which had been performing well, were sold off significantly.

The significant contributor to the Fund’s performance this month was mid-sized logistics operator SBS Holdings, Inc. Its share price gains appear to be a rebound to its rapid drop over the past two months amid profit-taking and concerns of rising gasoline costs. Call center operator Bell System24 Holdings, Inc. performed well, likely due to its announced dividend hike amid robust earnings and as a bounce back from the previous month’s drop. Housing loan lender and service provider Aruhi Corporation appears to have recovered from its previous share-price nosedive.

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Meanwhile, the stock that had the greatest negative impact on the Fund’s performance was employee benefits outsourcing contractor Benefit One Inc., which continued its share price decline from the previous month. While the firm is performing well, the sell-off was likely due to a rapid decline in barely undervalued stocks and stocks that made gains in the past. Biomass power station operator and waste recycler TRE Holdings Corporation also saw its share price fall despite no particularly adverse news, likely a response to past growth. Semiconductor production equipment manufacturer Towa Corporation has performed well due to active investments in semiconductor plants. However, its share price suffered in reaction to previous price increases.

Outlook for February 2022

The global stock market fell sharply in January due to prospects for greater-than-expected monetary tightening in the U.S. The decline was particularly severe in overvalued stocks and illiquid small-caps. Since monetary tightening represents a shift from the money-laden environment that has prevailed, its impact demands attention. However, even assuming that interest rates will rise, we believe that the Japanese stock market, especially the small-cap market, is oversold due to the abundance of undervalued stocks. On the other hand, in terms of short-term performance, we need to monitor the impact of rising energy and material prices, shortages in semiconductors and electronic components, and new waves of COVID-19 infections. Our investment policy is to re-examine stocks whose share prices have fallen significantly and increase our investment in those with high earnings growth prospects. Furthermore, given that the Japanese economy lags behind the rest of the world, we will seek out attractive domestic demand-related stocks that will benefit from Japanese economic recovery. We will also continue to review the Fund’s portfolio, focusing on structural changes as the economy normalizes.

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